Spain Reveals 100 Billion Euro Capital Flight

Claire Jones and Patrick Jenkins in London and Miles Johnson in Madrid, Financial Times

Friday, 1 Jun 2012 | 2:41 AM ETFinancial Times

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Madrid was dealt a double blow on Thursday after it emerged that almost €100bn in capital had left the country in the first three months of the year and the head of the European Central Bank lambasted its handling of Bankia, the troubled Spanish lender.

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Data published by Spain’s central bank showed €97bn had been pulled out in the first quarter – around a 10th of the country’s GDP – as concerns mounted over Madrid’s ability to contain its twin economic and financial crises, which have forced government borrowing costs to euro-era highs.

The data appeared to corroborate earlier assessments from economists that foreign investors were selling Spanish assets, while Spanish banks were increasing their holdings of domestic bonds, helped by cash accessed through the ECB’s three-year liquidity operations.

“My concern is that we haven’t yet seen the most recent numbers, which could be far worse,” said Raj Badiani, an economist at IHS Global Insight. “We are seeing a perfect storm.”

In a damning indictment of Spain’s handling of the problems at Bankia, its third largest lender, ECB president Mario Draghi said national supervisors had repeatedly underestimated the amount a rescue would cost. He also cited the rescue of Dexia, the Franco-Belgian lender, as an example.

“There is a first assessment, then a second, a third, a fourth,” Mr Draghi said. “This is the worst possible way of doing things. Everyone ends up doing the right thing, but at the highest cost.”

Mr Draghi’s comments come after Spain last week announced it would inject an additional €19bn of capital into Bankia. Madrid’s biggest bank nationalization will take the total amount of state aid pumped into Bankia to €23.5bn. In February, Spain said no more public money would be needed for its banks.

The comments are likely to be interpreted as a further criticism of the Bank of Spain. Its governor, Miguel Angel Fernández Ordóñez, is to step down a month early amid increasing political attacks at home over Spain’s banking crisis.

In recent months people close to the central bank said the bank had been increasingly cut out of Madrid’s banking clean-up as Mr Fernández Ordóñez became more politically isolated.

Mr Draghi said the lesson from Bankia was that the supervision of banks which presented a risk to the entire eurozone financial system should rest with a centralized authority, rather than national regulators.

Strengthening the European Banking Authority, currently a small regulatory body that relies on national regulators to interact with banks in each EU member country, could help advance the argument for pan-European bank bail-outs. That idea has been advocated by peripheral eurozone bankers and policymakers as a means to break the “feedback loop” between troubled sovereign finances and weak banks in need of state bail-outs.

Some European policymakers see a more powerful pan-EU banking supervisor as a vital pre-requisite for further mutualization of European funding issues, including the potential opening up of the European Stability Mechanism as a bail-out equity investor in banks.

“The main argument against the ESM taking direct bank stakes is that currently it is up to national authorities to decide on the financing needs of their own troubled institutions,” said one European official. “If a European entity is going to inject money into a bank it needs to have confidence in the numbers.”

Mr Draghi’s calls for more centralization of supervision are likely to meet with resistance elsewhere.

Less than two years old, the EBA has a small staff and its efforts to run tough stress tests and force recapitalization of weak banks have drawn public criticism and private resistance from a number of national regulators.

The criticism of national regulators is sure to raise hackles in the UK, where authorities have successfully rescued and recapitalized several banks, including Royal Bank of Scotland, one of the world’s largest.